The Implication of Limited Conventional Fossil Fuels and Declining EROI on Economic Growth in China

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1 The Implcaton of Lmted Conventonal Fossl Fuels and Declnng EROI on Economc Growth n Chna by Lanyong Feng a, Yngchao Chen a, Yan Hu b, Jngxuan Feng a, Chaoren Jn a, Bn Chen c, Wllam X We d a School of Busness Admnstraton, Chna Unversty of Petroleum (Bejng), Bejng, Chna; b Snopec Group Exploraton & Producton Research Insttute, Bejng, Chna; c College of Envronmental Scence, Bejng Normal Unversty, Bejng, Chna; d MacEwan School of Busness, Grant MacEwan Unversty, Edmonton, Canada; * Leadng author. Ttle: Professor; Address: NO. 18, Fuxue Road, Changpng Dstrct, Bejng, , P.R.Chna; Tel.: ; Fax.: ; E-mal: fenglyenergy@163.com Abstract EROI represents the rato between energy output and nput durng the process of energy producton. EROI evaluaton, as a new method, gves a fresh vew to solve some problems related to the economy and socety. In ths paper, we have calculated the EROI of Chnese fossl energy n detal and analyzed the mplcaton on Chna s economc Growth. By usng the C-D producton functon and the energy producton functon, the paper forecast the economc growth of n Chna. Takng the energy consumpton durng the producton process nto consderaton, we mprove the energy producton functon. We selected the known parameters of the hstorcal data from 1980 to 2011, and takng the use of the frst-order equaton of the resdual to get the unknown coeffcents accordng to the method of the least squares crteron. The fnal equaton wth 14 unknown parameters s a nonlnear equaton. To solve ths knd of smulaton, we buld a frst-error equaton to search for the value of the parameters. The program we use s run by Lngo. The declnng EROI of Chna s conventonal fossl fuels not only means decreasng energy qualty and ncreasng energy costs, but also a drop n net energy that s avalable to 1

2 the economc system; the mplcaton beng a change n the conventonal optmstc perspectve for energy supply. Ths paper proposes the defnton of avalable net energy consumpton as domestc energy producton equals net energy mports mnus energy consumpton. Even though the rato of energy consumpton to energy producton s mnus 4% to plus 5%, we cannot gnore ts mpact on economc growth n Chna. Keywords: Chna s EROI; Net Energy; Economc Growth; Conventonal Fossl Fuels Hghlghts 1. We apply the energy producton functon to smulate Chna s economc growth. 2. We propose a defnton of avalable net energy consumpton. 3. The economc growth n Chna wll probably declne from about 2015 to A small change n net energy n Chna has a large mpact on economc growth. 1 Introducton EROI, short for energy return on nvestment, represents the rato between energy nput and output durng the process of energy producton. The theory evaluatng energy producton and the related problems through the perspectve of net energy changes the tradtonal theory through total energy. EROI has been extensvely accepted and researched by academcs abroad, but most of the analyses on EROI appear only on news reports, and there are some devatons n understandng. In ths study, the authors have analyzed the basc theoretcal content on EROI (Hu et al., 2011) and calculated the EROI of Chnese fossl energy n detal (Hu et al., 2013). In the era of cheap energy, when the resource s adequate, the theory of economc development takes local currency as the unt of measurement for the maxmzaton of economc benefts. However, because of the close relatonshp between energy and exploraton, development, producton and transportaton, when the era of fossl energy shortage arrves, energy resources or the fundamental effort of energy gradually hghlght that energy consumpton nvolves both nputs and outputs. Wth the evoluton of energy producton equpment, energy consumpton ncreases n the process of energy producton, and that s why the current method of evaluaton for energy producton takes only partal consderaton of ncreased energy producton. A comprehensve evaluaton should focus not only on the analyss of energy resources, but should also reflect the fossl energy return on 2

3 energy producton and net energy s contrbuton, especally the mpact of ts sze on the economc system. The tradtonal economc model takes the company and the famly as the objects to explan the nfnte loop of energy. However, from the frst and second laws of thermodynamcs, we understand that economc actvty s an open system of nature. There s exchange between the economy and nature. Economc actvtes rely on the energy resources and other resources from nature, and dscharge waste to nature. Fossl fuels formed by absorbng solar energy and captal and labor formed by the economc system flow nto the energy producton process. Part of any economc output s needed to delver energy producton. Hence, what the economc system can use s net energy, whch s energy producton mnus the energy consumed by the producton process. The relatonshp between fossl energy and economc actvty s shown n Fg. 1 (Hall et al., 1986). Energy producton boundary Economc boundary Formng Industry Captal Solar URR Raw energy Raw energy Avalable 净能源 energy Commercal Labor Transport aton Publc sector Governme ntal servce Fg. 1. The relatonshp between fossl fuel producton and economc actvty (URR: ultmate recoverable resource) EROI makes the connecton between net energy and total energy, and declnes when the net energy of the economc system declnes. (When we compare two energy sectors wth the same joules producton, the sector wth the smaller value of EROI puts less energy nto the economy.) A lower value EROI means less energy s provded for the socal economc system. Takng a total output of 100, when EROI s 18:1, 94% of the net energy wll be provded for economc and socal beneft, but when EROI s 1.2:1, only 20% of the energy can be transformed (Murphy et al., 2011). 3

4 By our calculaton, the value of EROI of Chna s fossl energy has been declnng to ths pont and ths declne s rreversble (Hu et al., 2013). Whle we can see n ths that the net energy produced by fossl energy for economc and socal purposes s declnng, the effect of ths has been gnored n our economc system. For all of the above reasons, ths artcle analyzes the energy consumpton of the economc system from the perspectve of net energy and examnes ts mpact on Chna s economc growth. 2 Forecast of net energy consumpton 2.1 Conventonal fossl fuels producton The amount and avalablty of the remanng fossl fuel resources wll nfluence Chna s economc growth, energy securty, and potentally ts socetal stablty n the future. In recent years, the energy costs for fossl fuels extracton have been ncreasng. Hence, how much energy remans after extracton s an approprate research queston for Chna s future. The most mportant determnant of energy producton n the long-term s the total quantty of extractable resources wthn Chna s borders. Yan et al. (2013) have forecast Chna s fossl fuels supply wll last untl Net mport of conventonal fossl fuels As mentoned n the ntroducton, three possbltes are taken nto consderaton to predct Chna s fossl energy producton, measured n joules, from now to The artcle takes the rato of net mports and total producton as the evaluaton crtera, followng the method of Scenaro Analyss. The three states of hgh producton, moderate producton, and low producton are consdered separately to predct producton. Consderng the years from 1980 to 2011, the rato of net energy and producton of coal was 1.75% n 2011 and 2.8% on average; the same rato of petroleum was 122.5% n 2011 and 62.5% on average; the rato of natural gas was 27.2% n 2011 and 7% on average. Table 1. The rato of net mport and producton for fossl fuels n three scenaros low scenaro mddle scenaro hgh scenaro coal 1% 3% 5% crude ol 100% 120% 140% natural gas 10% 20% 30% 2.3 Energy consumpton for energy producton Energy producton nputs are affected by varous factors, such as lmts of technology, problems of producton, condtons of geology, and lack of nvestment. Takng all these factors nto consderaton, Coughln (2012), who studed the problem of energy consumpton n the producton sector, found that f energy consumpton s between 0 and 20%, the method 4

5 of lnear and nonlnear calculatons s smlar n calculatng μ the total consumpton rato of the economy except the energy sector and the EROI can be calculated by μ/μ 1. For ths, we predct energy consumpton from 2012 to 2025 durng the process of energy producton by studyng the lnear trends of the Chnese ol and gas ndustry and the coal mnng ndustry. Fg. 2. Multpler and the lnear approxmaton as a functon of fuel ntensty ln 2.4 Net energy consumpton As consumpton n the process of energy producton s also taken nto account, the supply we mentoned should be regarded as the sum of domestc producton plus net mports mnus the consumpton of fossl energy n producton, whch can be called net energy supply. Wth ths method, the net fossl energy supply of Chna, from 2012 to 2025, s calculated n hgh, moderate, and low states. In the Twelfth Fve-Year Energy Plan, the total prmary energy consumpton s clamed to be less than four bllon tons, and fossl energy consumpton may account for 89.6% of that. That means, 3.58 bllon tons of coal wll be consumed, whch s 120EJ, and s smlar to our assumpton. The artcle takes the moderate state of producton as the baselne scenaro of the total energy consumpton, so the other two states (hgher and lower) are contrasted to analyze the growth rate of GDP. Table 2. The consumpton of fossl fuels n three scenaros from 2012 to 2025(unt: J) year coal crude ol natural gas low scenaro total energy consumpton of two sectors

6 year mddle scenaro year hgh scenaro The mpact of declnng net energy consumpton n the md-long-term Durng the past 30 years, the economy of Chna has grown steadly at 9.98%. Rapd economc growth and the declne n energy ntensty have caused wdespread concern. Can the average annual growth target of 8%, whch s antcpated n the Twelfth Fve-Year Plan, 6

7 be acheved wth the lmtaton of the net fossl energy supply? Wll our economc growth be nfluenced? Our government may develop an energy strategy and energy polcy to acheve sustanable development by explorng answers to these questons. 3.1 The ntroducton of the research method The ntroducton of the C-D producton functon Producton functon, whch s wdely used n the study of economc growth, s a mathematcal model for descrbng the law of nputs and outputs n the producton process. Snce the concept was ntroduced n 1928, varous functons have been derved based on C-D producton. The C-D producton functon s especally wdely recognzed by the world after studyng and practcng. Its basc form s: Y F( K, L) K L 1, 0 1 (1) where Y means economc output, L means the amount of captal, α means elastcty of the output captal, and 1-α means the elastcty of output labor. As researchers contnue to explore the nner factors that nfluence economc growth, the parameters of the C-D producton functon keep alterng and more dervatve functons are found. By analyzng the nner connecton of the outputs, the characterstcs of the sample date, and typcal nput factors, we arrve at the parameters of the producton functon. The producton functon experenced a combnaton of changes n the form of labor and captal: from the ndvdual to the combnaton of the captal; from the smple to the complex of the workforce; from captal and labor double elements to takng addtonal systems, e.g., forms of organzaton, culture, and the role of government (Cleveland and Costanza, 1984). Dfferent economc growth models provde dfferent explanatons for understandng the realzaton of economc growth and also the theoretcal bass for adjustng the economy and economc polces. Snce mathematcal models are smply a smulaton of economc growth, they never acheve the actual way of the economy, so all we can do s make sure that our model has the smallest possble error. Only f the theory, the analyss tools, or the methods of research make a breakthrough can the theoretcal models of economc growth do better n smulatng what wll actually happen and play the best role n gudng and forecastng. The more factors connectng wth the facts that are taken nto consderaton and the more constrants and stuatons that are consdered, the better model t wll be The energy producton functon Tradtonal economc theores apply well to perods that have large and growng energy supples wth relatvely low costs of energy extracton, so polces or theores of varous knds 7

8 are feasble wth the protecton of an effcent energy supply. However, wth the pendng arrval of a post-ol era, slowng growth of fossl energy producton, and rsng ol prces, economc theores can no longer regard resources as "free gfts" they are lmted. Sooner or later, energy lmtatons wll not only be reflected n the weakenng of the economy, but also n the depleton of resources. Therefore, the foundaton of economc theores all have ther tmes of applcablty and ther perodcty; f we neglect the background of the theory, the classcal economc theory that promotes the growth of the economy may mpede subsequent growth. In order to hghlght fossl energy s restrcton of the growth of the economy and explan the connecton of energy, labor, captal, and economc outputs, Nel and Cooper (2009) bult an energy-type producton functon as: Y F( E, K, L) (2) where Y stands for economc outputs reflected by GDP, K stands for captal, L stands for the value of labor; E, connectng the consumpton structure, the growth of technology, and other factors, stands for the effectve energy of total consumed energy. Snce they ddn t take the energy consumpton of the producton nto consderaton, we wll mprove the model to nclude ths, and Formula 3 becomes: t Y A0e [ ( t) Eth, ( E, t)] (3) where t A e 0 stands for the exponental growth factor. To fulfll the need for economc growth, we assume that captal, labor, and producton capacty are suffcent; and these three factors wll be resolved as endogenous varables. stands for the growth ndex; t stands for E th, the tme n years; stands for the total energy of the number of ; stands for the effectve factors or fuel effcency of the number of. ( E t), stands for the energy consumpton of the number of n t years. ( t) E, ( E, t) th t stands for the net energy consumpton of the economc system or energy return. Each μ whch s the effectve factor of the fuel s tme related. Wth the advance of the technology and optmzaton of the fuel consumpton structure, the effectve factor μ follows the trend of the logstc curvng. The formula s shown as: 1 1 e ct t (4) 8

9 where s the lmt saturated value of, s the coeffcent, and t s the resdual tme 1 seres. Wth Equatons 3 and 4, we can take GDP as the economc output, so the complete energy-returnng producton functon s: t 1, GDP A0e [( ) Eth, ( E, t)] ct 1e (5) where GDP, E, and (, t) are all known, and the other parameters are unknown untl th E worked out. 3.2 The results of the modelng estmaton We selected the known parameters of the hstorcal data from 1980 to 2011, and takng the use of the frst-order equaton of the resdual to get the unknown coeffcents accordng to the method of the least squares crteron, the formula s expressed as: Mn Mn 2011 j1950 GDP j A e t o ( 1e 1, ct j ) E th,, j ( E, j, j, t) (6) The fnal equaton wth 14 unknown parameters s a nonlnear equaton. To solve ths knd of smulaton, the optonal methods are the best ways known to us. Here we buld a frst-error equaton to search for the value of the parameters. The program we use s run by Lngo. Lngo s specalzed software for solvng optmzaton methods. By complng the program n the language of Lngo and consderng the objectve functon and constrants, there are three ponts to be explaned. Frst, regardng the dates, we selected the GDP from 1980 to 2011, whch has been corrected by nflaton, to ensure that GDP numbers are credble. E, stands for the joules of coal, petroleum and natural gas. Second, how could we separate the date for dfferent sectors? As the Natonal Energy Statstcs Yearbook does not separate the consumpton of ol and gas out of the total for the date range selected, we chose to consder only two parts (ol and gas together and coal) rather than three (ol, gas, and coal) when wrtng the program. Thrd, based on our assumpton, the parameter ξ represents energy consumpton of the energy producton sector, although the Natonal Energy Statstcs Yearbook takes E to represent t. As the consumpton of the energy producton sector accounts for such a small proporton, t has to be dsconnected when used for forecastng future GDP. The parameters we get from the smulaton are shown n Table 3. Table 3. Solvng the unknowns 9

10 1 c A0 coal crude ol natural gas Wth the parameters above, we can get the actual GDP and the smulated GDP through the use of Equaton 5 wth MATLAB. The results are shown Fg GDP (10 12 Yuan) actual GDP smulated GDP Fg. 3. The trends of actual and smulated GDP As Fg. 3 shows, actual GDP and smulated GDP are a good match, wth a hgh correlaton of However, compared wth other perods, the GDP smulated from 1992 to 2005 s relatvely poor. From 1990 on, new polces have been constantly carred out and the country s nstablty and varablty make t hard to smulate GDP growth perfectly. 3.3 The analyss of the predcton Accordng to the three scenaros we set above (n Table 3) for dfferent net energy supples, we get dfferent trends for GDP as Fg. 4 shows. 10

11 25 GDP (10 12 Yuan) Fg. 4. Chna s economc growth n three scenaros untl 2025 (Y s GDP (10 12 Yuan).) Although the real GDP generally trends upward, ts growth rate over fve-year perods s n a downward trend, as we show n Table 4. Table 4. Hstorcal and forecast rate of change for real GDP from1981 to 2025 hstorcal rate forecast rate year % 7.92% 12.28% year % 9.76% 11.23% year low scenaro 7.56% 5.71% 3.66% basc scenaro 9.26% 6.01% 4.29% hgh scenaro 10.99% 6.30% 4.86% By comparng the results of the predcton ntervals, the stuaton we predct for 2011 to 2015 s most smlar to earler predctons of the World Bank. Snce we have ncluded lmtatons of fossl energy supply and growth of consumpton n energy producton, our predcton for 2016 to 2020 s relatvely lower than most results from other researchers (Chen and Yao, 2012) actual GDP forecast GDP(low scenaro) forecast GDP(hgh scenaro) From our results, we conclude that Chna s economc growth can acheve the goal (a growth rate of 8%) of the Twelfth Fve-Year Plan under the moderate state we assumed wth the resources and technologes we have today. However, as we contnue to predct results, the growth rate of Chna lowers as tme passes. Chna s n transton from a rapd growth phase to a medum-speed growth or even a perod of slow growth. smulated GDP forecast GDP(basc scenaro) In fact, compared to total energy producton, the consumpton of fossl energy producton s very low, at only 4 to 5%. However, ts effect on economc growth cannot be 11

12 gnored. When net mports are the same, we nclude fossl energy supply and net supply n the GDP growth predcton model. The outcomes show that, durng the perod of Chna s Twelfth Fve-Year Plan, the dfference between the predcton for fossl energy supply and net supply s about 1.3 to 1.5%, and that s really a large effect. Based on ths, Chna should strctly control energy consumpton n the energy producton sector and take the net energy and the net energy supply nto consderaton n the formulaton and analyss of any economc polcy. 4 Summary and concluson The EROI method focuses on energy physcally and ponts out the mportance of net energy by total joules of outputs and nputs. EROI, as a new method, gves a fresh vew to solve some problems related to the economy and socety. Its results tell us that the energy consumed by energy producton cannot be gnored. In ths paper, we predct that Chna s economc growth rate wll be 5.71% and 3.6% n the Thrteenth Plan and Fourteenth Plan perods, whch means Chna s economc growth wll break down. In the future, Chna needs to know how much net energy s avalable. The mpact of net energy on Chna s economy s huge even though the rato of energy consumed n the process of producton to energy produced s as small as 4 to 5%. We smulated the role of energy supply and net energy supply n the economc growth rate n Chna and found that the dfference between GDP growth rates usng total and net energy supply s about 1.3 to 1.5%. Therefore, Chna should consder net energy supply n energy decsons and decrease the actual energy consumed by the energy producton process. Acknowledgments Ths study has been supported by the Natonal Natural Scence Foundaton of Chna (Grant No ; Grant No ) and the Major Program of the Natonal Socal Scence Foundaton of Chna (Grant No. 13&ZD159). Helpful comments by anonymous revewers are kndly apprecated. References [1] Chen, Y.B., Yao, Y.W., The reason, challenge and polces of low economc growth n Chna. J. Renmn Unversty of Chna. 5, (n Chnese) [2] Cleveland, C., Costanza, R., Net energy analyss of geopressured gas-resources n the Unted States Gulf Coast Regon. Energy. 9, [3] Coughln, K., A mathematcal analyss of full fuel cycle energy use. Energy. 37,

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